NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Note 1.
|
Basis of Presentation
|
In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly American Shared Hospital Services’ consolidated financial
position as of March 31, 2016 and the results of its operations for the three month periods ended March 31, 2016 and 2015, which
results are not necessarily indicative of results on an annualized basis. Consolidated balance sheet amounts as of December 31,
2015 have been derived from audited consolidated financial statements.
These
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
for the year ended December 31, 2015 included in the Company’s 10-K filed with the Securities and Exchange Commission.
These
condensed consolidated financial statements include the accounts of American Shared Hospital Services (the “Company”)
and its subsidiaries as follows: The Company wholly-owns the subsidiaries OR21, Inc. (“OR21 LLC”), MedLeader.com, Inc.
(“MedLeader”), PBRT Orlando, LLC (“Orlando”) and American Shared Radiosurgery Services (“ASRS”).
The Company is also the majority owner of Long Beach Equipment, LLC (“LBE”). ASRS is the majority-owner of GK Financing,
LLC (“GKF”) which wholly-owns the subsidiaries GK Financing U.K., Limited (“GKUK”), and Instituto de Gamma
Knife del Pacifico S.A.C. (“GKPeru”). GKF is also the majority-owner of the subsidiaries Albuquerque GK Equipment,
LLC (“AGKE”) and Jacksonville GK Equipment, LLC (“JGKE”).
The
Company through its majority-owned subsidiary, GKF, provided Gamma Knife units to seventeen medical centers as of March 31, 2016
in the states of Arkansas, California, Oregon, Connecticut, Florida, Illinois, Massachusetts, Mississippi, Nevada, New Jersey,
New Mexico, New York, Tennessee, Oklahoma, Ohio, Texas, and Washington.
The
Company also directly provides radiation therapy and related equipment, including Intensity Modulated Radiation Therapy (“IMRT”),
Image Guided Radiation Therapy (“IGRT”) and a CT Simulator to the radiation therapy department at an existing Gamma
Knife site in the United States.
The
Company formed the subsidiaries GKUK and GKPeru, for the purposes of expanding its business internationally into the United Kingdom
and Peru; LBE and Orlando to provide proton beam therapy services in Long Beach, California and Orlando, Florida; and AGKE and
JGKE to provide Gamma Knife services in Albuquerque, New Mexico and Jacksonville, Florida. AGKE began operation in the second quarter
2011 and JGKE began operation in the fourth quarter 2011. Orlando treated its first patient in April 2016. GKPeru is expected to
begin operation in mid-2016. GKUK is inactive and LBE is not expected to generate revenue within the next two years.
The
Company continues to develop its design and business model for “The Operating Room for the 21st Century” SM (“OR21”
SM
), through its 50% owned OR21, LLC. The remaining 50% is owned by an architectural design company. OR21 is not expected
to generate significant revenue within the next two years.
MedLeader
was formed to provide continuing medical education online and through videos for doctors, nurses and other healthcare workers.
This subsidiary is not operational at this time.
Based
on the guidance provided in accordance with Accounting Standards Codification (“ASC”) 280
Segment Reporting
(“ASC 280”), the Company has analyzed its subsidiaries which are all in the business of leasing radiosurgery and radiation
therapy equipment to healthcare providers, and concluded there is one reportable segment, Medical Services Revenue. The Company
provides Gamma Knife and IGRT equipment to seventeen hospitals in the United States as of March 31, 2016. These seventeen locations
operate under different subsidiaries of the Company, but offer the same service, radiosurgery and radiation therapy. The operating
results of the subsidiaries are reviewed by the Company’s Chief Executive Officer and Chief Financial Officer, who are also
deemed the Company’s Chief Operating Decision Makers (“CODMs”) and this is done in conjunction with all of the
subsidiaries and locations.
On
January 14, 2016, the Company entered into a definitive lease agreement for financing of its MEVION S250 at UF Health Cancer Center
at Orlando Health. The proceeds of $7,900,000 received to date, from this financing of approximately $8,400,000, were used to pay-down
the $1,000,000 in Promissory Notes (the “Notes”) with four members of the Company’s Board of Directors, reimburse
the Company for freight costs associated with the MEVION S250, and to fund one of the remaining milestone payments for the MEVION
S250 of approximately $6,700,000. Total proceeds from capital lease financing for reimbursement of payments for acquisition of
equipment, were approximately $1,137,000.
Based on the guidance provided in accordance
with ASC 405
Extinguishment of Liabilities
(“ASC 405”) and ASC 470
Debt Modifications and Extinguishments
(“ASC 470”), the pay-down of the Notes is considered an extinguishment of debt and, as such, the difference between
the net carrying amount of the Notes and the costs of extinguishment were recognized as a loss on the Company’s condensed
consolidated Statements of Operations. For the three month period ended March 31, 2016, the loss on early extinguishment of debt
was $108,000. The Notes were issued with common stock warrants with an estimated fair value of $145,000. The unamortized balance
of the discount on the Notes, of $80,000, and deferred fees incurred from the issuance of the Note of approximately $28,000, were
recorded as loss on early extinguishment.
In
May 2014, the Financial Accounting Standards Board “(FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), (“ASU 2014-09”), which requires an entity to recognize
the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will
replace most existing revenue recognition guidance in United States Generally Accepted Accounting Principles (“GAAP”)
when it becomes effective. The new standard is effective for the Company for annual reporting periods beginning after December
15, 2017. Early application is permitted for reporting periods beginning after December 15, 2016. The standard permits the use
of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to delay the effective date of
this standard until the first quarter of 2018. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated
financial statements and related disclosures and has not yet selected a transition method.
In
August 2014, FASB issued ASU No. 2014-15,
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going
Concern
(“ASU 2014-15”), which provides guidance on determining when and how to disclose going-concern uncertainties
in financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU
2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted. The Company is currently evaluating the impact of this update on future disclosures concerning its
liquidity position.
In
January 2015, the FASB issued ASU No. 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items
(“ASU 2015-01”), which eliminates
from GAAP the concept of extraordinary items and requires that an entity separately classify, present, and disclose extraordinary
events and transactions. This ASU will also align more closely GAAP income statement presentation guidance with International Accounting
Standards (“IAS”) 1
, Presentation of Financial Statements
, which prohibits the presentation and disclosure of
extraordinary items. The new standard was effective for the Company on January 1, 2016. The standard permits the use of either
the retrospective or prospective application. The Company adopted ASU 2015-01 on January 1, 2016 and the adoption did not have
a material impact on the condensed consolidated financial statements and related disclosures.
In
February 2015, the FASB issued ASU No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU
2015-02”), which is intended to improve targeted areas of consolidation guidance for legal entities. The ASU focuses on the
consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal
entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB ASC
and improves current GAAP. The new standard was effective for the Company on January 1, 2016. The Company adopted ASU 2015-02 on
January 1, 2016 and the adoption did not have a material impact on the condensed consolidated financial statements and related
disclosures.
In
April 2015, the FASB issued ASU No. 2015-03,
Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs
(“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability,
be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The new standard
was effective for the Company on January 1, 2016.
The
Company adopted ASU 2015-03 on January 1, 2016, on a retrospective basis. Debt issuance costs that were previously recorded as
other assets on the Company’s condensed consolidated Balance Sheets were reclassified as an offset to the respective debt
instrument for which they were derived. As of March 31, 2016 and December 31, 2015, $67,000 and $72,000 were reclassified from
current and noncurrent other assets to current and noncurrent debt, respectively.
In
January 2016, the FASB issued ASU No. 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”) which requires equity investments, except those accounted for under the equity method of accounting
or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net
income. The new guidance is effective for the Company on January 1, 2018. Early adoption is permitted. The standard permits the
use of cumulative-effect transition method. The Company is evaluating the effect that ASU 2016-01 will have on its consolidated
financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02
Leases
(“ASU 2016-02”), which requires lessees to recognize,
for all leases, at the commencement date, a lease liability and a right-of-use asset. Under the new guidance, lessor accounting
is largely unchanged. The new guidance is effective for the Company on January 1, 2019. Early adoption is permitted. The Company
is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.
In
March 2016, the FASB issued ASU No. 2016-09
Compensation – Stock Compensation
(Topic 718)
(“ASU 2016-09”)
which changes five aspects of accounting for share-based payment award transactions including 1) accounting for income taxes; 2)
classification of excess tax benefits on the statement of cash flows; 3) forfeitures; 4) minimum statutory tax withholding requirements;
5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes.
The new guidance is effective for the Company for interim and annual periods beginning after December 15, 2016. Early adoption
is permitted. The Company is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related
disclosures.
|
Note 2.
|
Per Share Amounts
|
Per
share information has been computed based on the weighted average number of common shares and dilutive common share equivalents
outstanding. The computation for the three month periods ended March 31, 2016 and 2015 excluded approximately 617,000 of the Company’s
stock options because the exercise price of the options was higher than the average market price during those periods.
The
following table sets forth the computation of basic and diluted earnings per share for the three month periods ended March 31,
2016 and 2015:
|
|
Three Months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net income attributable to American Shared Hospital Services
|
|
$
|
51,000
|
|
|
$
|
128,000
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares for basic earnings per share
|
|
|
5,541,000
|
|
|
|
5,477,000
|
|
Diluted effect of stock options and restricted stock
|
|
|
-
|
|
|
|
49,000
|
|
Weighted average common shares for diluted earnings per share
|
|
|
5,541,000
|
|
|
|
5,526,000
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
Diluted earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
Note 3.
|
Stock-based Compensation
|
On
June 2, 2010, the Company’s shareholders approved an amendment and restatement of the 2006 Stock Incentive Plan (the “2006
Plan”). Among other things, the amendment and restatement renamed the 2006 Plan to the Incentive Compensation Plan (the “Plan”)
and increased the number of shares of the Company’s common stock reserved for issuance under the Plan by an additional 880,000
shares from 750,000 shares to 1,630,000 shares. The shares are reserved for issuance to officers of the Company, other key employees,
non-employee directors, and advisors. The Plan serves as successor to the Company’s previous two stock-based employee compensation
plans, the 1995 and 2001 Stock Option Plans. The shares reserved under those two plans, including the shares of common stock subject
to currently outstanding options under the plans, were transferred to the Plan, and no further grants or share issuances will be
made under the 1995 and 2001 Plans. On June 16, 2015, the Company’s shareholders approved an amendment and restatement of
the Plan in order to extend the term of the Plan by two years.
Stock-based
compensation expense associated with the Company’s stock-based options to employees is calculated using the Black-Scholes
valuation model. The Company’s stock-based awards have characteristics significantly different from those of traded options,
and changes in the subjective input assumptions can materially affect the fair value estimates. The estimated fair value of the
Company’s option grants is estimated using assumptions for expected life, volatility, dividend yield, and risk-free interest
rate which are specific to each award. The estimated fair value of the Company’s options is amortized over the period during
which an employee is required to provide service in exchange for the award (requisite service period), usually the vesting period.
Accordingly, stock-based compensation cost before income tax effect, for the Company’s options and restricted stock awards,
in the amount of $59,000 and $36,000 is reflected in net income for the three month periods ended March 31, 2016 and 2015. At
March 31, 2016, there was approximately $440,000 of unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. This cost is expected to be recognized over a period of approximately four years.
The
following table summarizes unvested restricted stock awards, consisting primarily of annual automatic grants and deferred compensation
to non-employee directors, for the three month period ended March 31, 2016:
|
|
Restricted
Stock
Awards/Units
|
|
|
Grant Date
Weighted-
Average
Fair
Value
|
|
|
Intrinsic
Value
|
|
Outstanding at January 1, 2016
|
|
|
3,000
|
|
|
$
|
2.58
|
|
|
$
|
-
|
|
Granted
|
|
|
32,000
|
|
|
$
|
1.89
|
|
|
$
|
-
|
|
Vested
|
|
|
(8,000
|
)
|
|
$
|
1.89
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding at March 31, 2016
|
|
|
27,000
|
|
|
$
|
1.97
|
|
|
$
|
7,000
|
|
The
following table summarizes stock option activity for the three month period ended March 31, 2016:
|
|
Stock
Options
|
|
|
Grant Date
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Life (in
Years)
|
|
Outstanding at January 1, 2016
|
|
|
614,000
|
|
|
$
|
2.86
|
|
|
|
5.10
|
|
Granted
|
|
|
3,000
|
|
|
$
|
1.90
|
|
|
|
6.94
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2016
|
|
|
617,000
|
|
|
$
|
2.85
|
|
|
|
4.86
|
|
Exercisable at March 31, 2016
|
|
|
82,000
|
|
|
$
|
2.74
|
|
|
|
2.69
|
|
|
Note 4.
|
Investment in Equity Securities
|
As of March 31, 2016
and December 31, 2015 the Company had a $579,000 investment in the common stock of Mevion Medical Systems, Inc. (“Mevion”),
formerly Still River Systems, Inc., representing an approximate 0.46% interest in Mevion. The Company accounts for this investment
under the cost method.
The
Company carries its investment in Mevion at cost and reviews it for impairment on a quarterly basis, or as events or circumstances
might indicate that the carrying value of the investment may not be recoverable. During the period ended December 31, 2015, the
Company determined that its investment was other than temporarily impaired. In determining the fair value of the Company’s
common stock in Mevion, the Company engaged a third party expert to review and corroborate its assessment of the fair value of
the investment. The third party utilized the market approach and an option waterfall model calibrated to Mevion’s last round
of funding. Each equity class was examined and priced according to its liquidation preferences. The fair value of the Company’s
investment in Mevion, as of December 31, 2015, was approximately $579,000 with an impairment loss for the year then ended of $2,140,000.
The
Company reviewed this investment at March 31, 2016 in light of both current market conditions and the ongoing needs of Mevion to
raise cash to continue its development of the first compact, single room proton beam radiation therapy (“PBRT”) system.
Based on its analysis, the Company determined no additional impairment needs to be recognized as of March 31, 2016.
The
first MEVION S250, located at Barnes-Jewish Hospital in St. Louis, MO (“Barnes-Jewish Hospital”), treated its first
patient on December 19, 2013. The second MEVION S250, located at the Ackerman Cancer Center in Jacksonville, Florida (“Ackerman
Cancer Center”), treated its first patient in April 2015. The third MEVION S250, located at Robert Wood Johnson University
Hospital in New Brunswick, New Jersey (“Robert Wood Johnson”), started in May 2015. The Company’s first MEVION
S250 treated its first patient on April 6, 2016.
|
Note 5.
|
Fair Value of Financial Instruments
|
The
Company’s disclosures of the fair value of financial instruments is based on a fair value hierarchy which prioritizes the
inputs to the valuation techniques used to measure fair value into three levels. Level 1 inputs are unadjusted quoted market prices
in active markets for identical assets and liabilities that the Company has the ability to access at the measurement date. Level
2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for assets or liabilities, and reflect the Company’s own assumptions about
the assumptions that market participants would use in pricing the asset or liability. The estimated fair value of the Company’s
assets and liabilities as of March 31, 2016 and December 31, 2015 were as follows (in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Carrying
Value
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
2,190
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,190
|
|
|
$
|
2,190
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
2,190
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
2,769
|
|
|
$
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,321
|
|
|
$
|
8,321
|
|
|
$
|
8,204
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,321
|
|
|
$
|
8,321
|
|
|
$
|
8,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash
|
|
$
|
2,259
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,259
|
|
|
$
|
2,259
|
|
Investment in equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
|
|
579
|
|
|
|
579
|
|
Total
|
|
$
|
2,259
|
|
|
$
|
-
|
|
|
$
|
579
|
|
|
$
|
2,838
|
|
|
$
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
|
$
|
9,744
|
|
|
$
|
9,525
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,744
|
|
|
$
|
9,744
|
|
|
$
|
9,525
|
|
|
Note 6.
|
Repurchase of Common Stock
|
In
1999 and 2001, the Board of Directors approved resolutions authorizing the Company to repurchase up to a total of 1,000,000 shares
of its own stock on the open market, which the Board reaffirmed in 2008. There were no shares repurchased in 2016 or 2015. There
are approximately 72,000 shares remaining under this repurchase authorization.
We
generally calculate our effective income tax rate at the end of an interim period using an estimate of the annualized effective
income tax rate expected to be applicable for the full fiscal year. However, when a reliable estimate of the annualized effective
income tax rate cannot be made, we compute our provision for income taxes using the actual effective income tax rate for the results
of operations reported within the year-to-date periods. Our effective income tax rate is highly influenced by relative income or
losses reported and the amount of the nondeductible stock-based compensation associated with grants of our common stock options
and historically from the results of foreign operations. A small change in estimated annual pretax income (loss) can produce a
significant variance in the annualized effective income tax rate given the expected amount of these items. As a result, we have
computed our provision for income taxes for the three month periods ended March 31, 2016 and 2015 by applying the actual effective
tax rates to income reported within the condensed consolidated financial statements through those periods.